Bed Bath & Beyond earnings were ‘just a disaster every way you look’: Retail analyst

Storch Advisors CEO, and former CEO of Toys R Us and Hudson’s Bay, Gerald Storch sits down with Yahoo Finance Live to break down Bed Bath & Beyond's unraveling after a Q1 earnings miss and the dismissal of its CEO, its pandemic-era business, and the outlook of the retail industry.

Video transcript

SEANA SMITH: Well, it is a challenging landscape for retailers right now. Consumer expectations falling to a nine-year low as inflation weighs on Americans. And that's having a direct impact on retailers, as some of those big players struggle with shifting consumer habits. We want to bring in Jerry Storch. He's the CEO of Storch Advisors, former CEO of Toys R' US, as well as Hudson's Bay.

Jerry, it's great to see you again. You're the perfect person to talk to you because Bed, Bath & Beyond was the latest company to post their results. The stock off just over 20% today, a huge plunge once again in their same store sales. And they're trying to figure out how they fit in, as we see this shift in consumer behavior. What's your perspective, just in terms of the changes and what retailers need to do in order to excel in this environment?

GERALD STORCH: Well, all the easy jobs are taken. And they worked hard at this. But I have to say, I think the last time we spoke, I mentioned that they were not looking good. And we're going to be one of the big casualties coming up, as are the department stores and mall-based apparel retailers. The reason is they really are caught in a mess here. And their strategy wasn't good before the pandemic. It didn't work during the pandemic. They got a little bounce coming out of the pandemic because everyone kept spending a bunch of money. But having said that, they didn't change anything.

So what did they do? They took a business that was poor and declining, albeit slowly, and they said, oh, you know what it needs, is more private label. So-- this is Bed, Bath & Beyond. So they added all these private labels. But what they did in the process was take away everything that made it distinctive.

So now when you walk in a Bed, Bath & Beyond, you have something that they so-called cleaned up. But what they really did is take away their competitive advantage. You go to a big-box category [INAUDIBLE] to find the things you can't find anywhere else. If you over-edit the assortment, all you are is a poor version of Target. And they took away a lot of the national brands, which was another reason people were going there.

And frankly, it was a mess. I did a store check recently. I couldn't figure out what they were trying to do. They were caught halfway between kind of an incremental strategy, which wouldn't work, and major change, which they didn't make. And so it's a really a noxious hybrid that has no hope of succeeding in its current form. And this was an inevitability.

So Bed, Bath & Beyond was a strategy error. It's not simply a matter of it being too difficult to operate in this environment. They've blamed it on the environment. They've blamed it on everything else. But really-- and they even depromotionalized the promotional business over the holiday season. You know, it's just a disaster every way that you look. But again, I know they worked hard at it. They just drove themselves into a corner, from which they may never escape because they're bleeding cash, and it doesn't look good.

RACHELLE AKUFFO: And it's interesting because we saw other retailers like Target, who have too much inventory. Bed, Bath & Beyond ended up not having enough merchandise. And now, of course, we're looking at potentially spinning off the buybuy BABY part of the business as well. What sort of options are there for Bed, Bath & Beyond at this point?

GERALD STORCH: Well, they certainly could and should spin off buybuy BABY. It's probably still a viable business. I would point out it only looks good in its performance compared to the base Bed, Bath & Beyond business. It still ran at negative same store sales for the latest quarter. And they have not kept up during the pandemic. That business has been going to Target and to Amazon and to Walmart and to other online retailers, and away from buybuy BABY for a long time. And so that's possibly a viable business.

They'll get a few hundred million dollars for it, but it's not going to address the problems with the core business, which are quite serious. They needed to revolutionize the business. They didn't do it. It sounds like from the standpoint of the temporary board management, they're going to go back to basics and try to go back to the way they used to be more and to implement better. But they're implementing a strategy that wasn't working to begin with. That's why they brought in the current CEO, the fellow who just left.

So it's not going to work. They're just going to continue to decline. And they really don't have a place in their current form in American retailers. It would require a major revolution, as I've said many, many times, for Bed, Bath & Beyond to make it out the other side of this pipe.

And I'll tell you, the same thing is true of department stores. Everyone's acting like, oh, they fixed it. It's great, just because they come off the pandemic, and people have to buy clothes to wear to work. But as soon as we hit the recession coming into the fall here, they're going to look pretty poor, too. And it's going to be obvious to their strategies aren't fixed, as are not the strategies that mall-based apparel retailers like the Gap. They couldn't post worse numbers.

DAVE BRIGGS: And Gerald, I hate to ask, and maybe you just answered it, but who followed a similar playbook? Who could be the next Bed, Bath & Beyond?

GERALD STORCH: Well, I would say the changes they made at Bed, Bath & Beyond were uniquely poor.

DAVE BRIGGS: Ah.

GERALD STORCH: There are companies that have done a better job. I think Kohl's has done a better job of trying to incrementally improve their business. Macy's has done a better job of improving their business. But it's a very, very tough act. And neither one of them have made the significant changes, which were required in the business. I recently said that, for example, about Kohl's. And people said, oh, well, look, why are people paying so much for it then, when it looked like somebody was going to pay a lot for it.

And sure enough, just a week or two ago, reportedly, the folks who were going to buy Kohl's lowered their bid by a substantial degree. And none of those businesses has a bright future in their current form. They have never addressed two fundamental problems. One, what to do about the internet, and two, what to do about their aging consumer, because, frankly, younger consumers don't just don't shop at those department stores anymore.

I see you have TJ Maxx on this list. That's different. I would not call them a department store, by the way, nor would I call Burlington a department store. Those are off-price retailers. I think TJ Maxx has a great future. They're brilliant. And that's where a lot of department store business has gone. TJ Maxx market cap, by the way, is greater than the combined total of all of the true department stores put together, including Nordstrom, Macy's, Dillard's, Kohl's, all. So that's been a great story of off-price retailing and true value. Their slogan is, why pay department store prices? Pretty soon, they're going to be the only stores left.

SEANA SMITH: Hey, Jerry, what do you make-- RH just reporting earnings a few minutes ago, lowering their outlook. They're saying that demand-- they see demand continuing to slow, excuse me, throughout the rest of the year. The stock off just about 7%. You mentioned the fact that some of those lower end retailers are doing OK, the off-- the discount brands. But when you take a look at what's happening to RH, compare that to what's happening Bed, Bath & Beyond, it looks like the luxury end of things and the lower end of retail both seem to be struggling a bit in this environment.

GERALD STORCH: We're either in a recession or going into one, Seana. So it's no surprise at all. And keep in mind, luxury sales are directly proportional to the stock market. So the stock market has taken a hit recently. That's going to show itself in luxury product sales for sure. The R squared is, like, 90% between sales and luxury products and stock market performance. So that's bound to happen. It's absolutely going to happen.

But a company like Restoration Hardware has a future. They have distinctive product. They have a niche. People want to buy what they have to sell. That's simply no longer true about Bed, Bath & Beyond. And it's no longer true about department stores. You can get clothing anywhere. And in fact, the biggest issue, again, the younger generations don't want to buy the same clothes their grandmother did.

So they're buying more unique clothes from internet companies like Revolve or somebody or from smaller businesses. They don't want to see themselves coming and going in the same-- I won't start naming brands and be mean to them, but the same brands that are dominant department store brands. It simply doesn't work anymore. And so a department store model that was based upon key vendors who would basically buy the space, in essence, with markdown money and sell it in all the different department stores, that model is shot.

Department stores could have a future because after all, oh, it's a big box. You can put whatever you want in it. But they have to revolutionize themselves. And they aren't doing it. There's not one example that's doing it. Nordstrom is the best act in the whole business. They had a pretty good quarter, but that's only by comparison. They are a shadow of their former greatness. And they're not on a path to change any of that. In fact, the best division at Nordstrom is Nordstrom Rack, the discount division, just like TJ Maxx.

So as you enter the recession, I think we're going to see value players do the best. Target and Walmart are going to come back. They messed up, you know, especially Target, much worse than Walmart. They messed up in the first half of this year. They aren't going to blow that again. They'd rather run out of stock this time than have too much.

They're going to do great as compared to other retailers, as you get into the fourth quarter, as well Amazon, who I think came out first because they're in a different schedule by a month than other retailers, and everyone thought it was unique to Amazon, the problems they mentioned. But actually, they're looking pretty good when you look at what some of those reported. They're going to-- they built capacity way in advance of need. They're going to use that capacity and need it as it gets to the fourth quarter. And they're going to start looking really strong.

You know, in the case of Amazon, they're going to be great. Costco's been strong throughout-- through all periods. Home Depot has been strong through all periods. TJ Maxx has been excellent. The dollar stores are going to rise. Any-- Walmart is going to do well. Any company that uses less of the consumer dollar to run the business is going to do great. And there are a lot of them. So I'm not worried about all of retail. I'm certainly worry about the people who claim to have fixed their strategies when they really didn't. And Bed, Bath & Beyond is an icon of that.

RACHELLE AKUFFO: And a lot of people looking for deals as companies are holding on to the inventories. And you have Amazon coming up with its two-day Prime Day, hoping to really reboot the stock there. What are your take on some of these sort of events, these holiday shopping events? Are they going to be enough to really bring Amazon and some of these other e-commerce brands back to business?

GERALD STORCH: Well, I think Amazon got-- I said it at the time. Amazon got an unfair sort of rap when they reported their results. They were up so dramatically during the pandemic, it was just simply impossible to comp well against that. But now as they start to comp against lower numbers, they're going to look better and better. And again, I think they're going to be fine.

And Prime Day, happening in the summer, will be something of an event. It won't be as big as when it happens in October. But they'll certainly draw traffic. But people get bored with the same, the Prime Day, Prime Day, Prime Day. They'll buy the Amazon products. They'll do well. It'll be a nice boost.

But where they're really going to shine is in the fourth quarter. Look, I buy everything from Amazon. I don't know about you. And it's so easy. And almost anything I need, it gets here the same day or the next day now, because they have the capacity. And no one can even come close. So they are still the leader technologically, sales wise, and delivery wise, in terms of how well they perform when you order something, and you can track it, and you're going to get.

They're the leader and by far the fastest growing in the retail segment, which is e-commerce. So I wouldn't sell them short, not by a long shot. And again, Target and Walmart are going to come back fine. Costco is going to be great. The same guys are going to rise to the top. And the people that weren't winning before, if you want to believe the story they fixed their business, you believe it. They haven't fixed their business. And you're going to see them start to suffer pretty mightily as we get into the fourth quarter here.